In late 2015, the Consolidated Appropriations Act of 2016 made qualified charitable distributions (QCDs) permanent for IRAs. The QCD provision permits anyone age 70½ to make tax-free distributions directly from an IRA to a qualified charity (a church, school or 501(c)(3) non-profit). The donation is limited, but the limit rarely matters because it is $100,000 per person (married couples filing jointly may exclude up to $100,000 donated from each spouse’s IRA). Furthermore, a QCD will count toward partially or fully satisfying your required minimum distribution for that tax year.
The withdrawal is a tax-free distribution; so, the amount is excluded from gross income and is therefore not tax-deductible when you itemize deductions. The benefit is great for people who do not itemize deductions and who would not otherwise be able to benefit from a charitable donation deduction anyway. Because it is excluded from your gross income, you will lower your taxable income and then still take the full standard deduction. However, for people who do itemize, the withdrawal would still be excluded from the calculation of your adjusted gross income. This is beneficial because it makes other things like health-care expenses more likely to be deductible and potentially less of your Social Security to be considered taxable.
Donations from an inherited IRA are also eligible to be made through the QCD if the beneficiary is at least age 70½. However, donations from a SEP IRA or SIMPLE IRA are NOT eligible. That said, most people who retire are not rolling their 401(k) into a SEP or SIMPLE IRA; you typically will roll over to a Traditional or Rollover IRA which are eligible to take advantage of a QCD. Lastly, the charitable recipient must be a charity under the definition given in the 501(c)(3) tax code (like a local/national charity, church or school). Non-operating private foundations, and their supporting organizations, as well as donor-advised funds do not qualify to receive money from a QCD.
Be sure to take advantage of this great opportunity to satisfy your Required Minimum Distribution, while supporting your local non-profits and potentially saving yourself thousands of dollars in income taxes in the process. For more information on how to include this strategy in your retirement and estate planning, give us a call.